Three More Compelling Reasons To Like Oilsands Quest

Jul.16.07 | About: Oilsands Quest, (OBQI)

Back on September 26, 2006, there was an article on Seeking Alpha titled “Nine Good Reasons to Like This Oilsands Name”. On January 18, 2007, another article was published entitled “A Tenth Good Reason to Like Oilsands Quest”. Well, given some developments Thursday, I thought it would only be fitting to follow up those articles with another on Oilsands Quest (AMEX: BQI).

1. Risk to the Story Has Been Reduced Materially: Management came out on July 12th saying that it believes it has 10 billion barrels of resource on the acreage that it has drilled so far, which is only a portion of its total acreage. Perhaps more important, management believes that the bitumen can be recovered using in situ processes with recoverability rates of 53% to 84%. That compares to the “rule-of-thumb” in situ recovery factor of 40%.

Management is continuing to deliver on its promises, which should significantly bolster investor confidence going forward. To put things in perspective, two of the largest concerns on the stock have been: 1. How much resource does it have? And 2. Can it produce the resource? With the announcement, management has indicated answered those two questions.

2. Big Catalysts Abound: In the September-October timeframe, management will be releasing the results of an independent assessment of its resources. Part of the assessment will be made by Norwest, the same company that estimates big oil sand company resources, such as Suncor, etc. When this assessment comes out, I expect some significant increases in target prices from both of the only two analysts that cover the stock at Genuity and Blackmont. Both of these analysts current have target prices between $5 and $6 per share. If the independent assessment confirms management’s numbers, I would expect some big target price increases to the stock to the $15 - $25 range. More importantly, with the third party data, the company will be able to commence joint venture discussions with Big Oil. When a JV is announced and the company’s business model (explore, identify and partner up on oilsands projects), I think you’ll see an additional significant leg up for the stock. At that point, the company will likely more towards the $1 billion market cap range, which I believe is necessary to get Wall Street analyst sponsorship from the big brokerage houses. In addition, the company plans to list its shares on the TSX (in addition to its current AMEX listing), which should drive incremental demand from Canadian investors (after all, they would be buying a business operating in their front yard).

3. The Stock’s Potential Upside Leave a Tremendous Cushion: Assuming that the company really has 10 billion barrels, that each barrel in the ground is worth $0.95 (the average of $0.90 to $1.00), that recoverability rate on the bitumen is 69% (the average of the 53% and 84% management indicated the other day), and that there are about 250 million fully-diluted shares, the stock would be worth at least $26 per share (=10 billion barrels X $0.95 per barrel X 69% recoverability / 250 million shares). That would equate to 665% upside. Given that a big upward move is likely over the next couple months makes this stock an even more attractive investment. And considering the recent re-focus of Big Oil away from Venezuela and the re-focusing on Canada, I think this stock will likely be an attractive take out target for a number of Big Oils over the next two years.

BQI 1-yr chart

BQI

Disclosure: none